Article - Mortality Charges

What are mortality charges?
Mortality charges are that part of life insurance premium that go towards providing a death benefit cover. In other words, these are the actual cost of insurance in a life policy. In most policies, the bulk of the premium goes towards investing in a savings fund which is returned to the policyholder when the policy matures or the policyholder dies.

How are they calculated?
Most companies use a table of charges prepared by the Life Insurance Corporation (LIC) since this is the only company which has five decades of experience and consequently has historical data on life expectancy. Since private insurers have been around for a decade, some have made alterations to the rates based on their own experience. Work is on progress on a new mortality table with data from all companies and prices are expected to fall as life expectancy has gone up.

Will the policyholder benefit from buying a policy at a young age?
Yes. For instance, the life expectancy of a 25-year-old will be higher than that of a 55-year-old, and hence, the former will stand to benefit in terms of lower charges while buying insurance.

How will the updated mortality table impact pension policies?
Since the life expectancy of the average Indian has gone up, it is likely that you will have to incur a higher cost when it comes to buying whole-life annuities. Those who invest in pension plans will have to use at least two-thirds of the accumulated sum to buy annuities — a product where the investor gets regular income for a specified period in return for a lumpsum payment. The savings under a pension plan have to be invested in annuities to avoid them being taxed. One-third of the pension fund value at maturity is made available to the insured for tax free. The balance has to be used for purchase of annuities from any insurer.

Source - economictimes.com